Goodpack is in the business of providing containers for transportation of bulk material, especially natural rubber, in which it claims to have a 40% share of the world market. It has also looked to enter the markets for synthetic rubber, food and chemicals.

Goodpack's strong point is that its design for its so-called Intermediate Bulk Container (IBC) is patented, and that it owns a strong fleet of over 600,000 such containers which are in strong demand, especially by tyre manufacturers who are strong users of rubber. Although I really cannot see what is so unique about their steel boxes after reading about them (see References below), it is clear that their consistent earnings growth and high profit margins since their listing several years back suggests that they have a strong relationship with their customers.

As usual, what brings this stock to my attention is its high PE. It is currently trading at an astonishing 26 times PE, way above what I would consider paying for even a blue chip stock which Goodpack hardly is. Even allowing for 30% earnings growth this year, the forward PE is still 20 times. NTA is only 25 cents. It is priced like a growth stock with a strong global brand name. Increasingly, it looks to me like an example of a stock whose price might have peaked after being a beneficiary of increased broker coverage since early 2000; its recent rise might have something to do with Wong Ngit Liong, Venture's CEO, buying in a stake from its substantial shareholder David Lam.

Look at the key industries that Goodpack serves. The primary one is the tyre industry. There is little doubt that the automobile industry looks set to do well in the next few years given the buoyant global economy resulting in higher consumer spending on housing and automobiles. However if one wants to make a stock play on the automobile sector, surely it makes sense to buy other related stocks which are priced at less risky PEs of 10-12, such as YHI or Stamford Tyres? These tyre distributors are certainly strategic partners to the tyre manufacturers given their long-established distribution channels. For a second comparison, look at bulk shipping in general. The Baltic Dry Index has fallen by half over the past year, and bulk shippers/supply chain managers like Noble are starting to stagnate. Other than rubber, I hardly think its margins in the other bulk transportation markets are going to widen much further this year.

And now we come to supply. I think one of the key strengths of Goodpack over the past year has been its strong existing fleet of containers. Remember that steel prices had been surging in 2004, which meant manufacturing new ones were expensive and hence those holding such existing assets (ie. Goodpack) had pricing power. Now steel prices have fallen sharply over the last 2-3 months. Furthermore, there have been reports of a glut of shipping containers due to overinvestment. That is why container manufacturers such as Singamas, listed on the SGX, have dropped ~30-40% over the last few months. Although these containers are not the type owned by Goodpack (the former is much bigger), it should be reasonable to deduce that the general supply in shipping containers is probably not tight and previous estimates of demand might have been overly optimistic. One of Goodpack's strategies has been to maximise its IBC utilisation by matching outbound trips (say, transporting rubber) with return trips (say, transporting chemicals), hence doubling usage and maximising efficiency as compared to its current itinerary of one load per return journey. Such a container glut might jeopardise its plans because the excess containers will be priced so cheaply as to be irresistable to shippers irregardless of whatever technological advantages Goodpack's IBCs might have.

All in all, not a stock worth buying or exploring further unless Warren Buffett comes in and buys a stake.

4 Comments:

Anonymous said...

I like the notion of stocks one shouldn't buy, and agree the pe and present price of Goodpack is too high, but I think this is one which shouldn't be on your list of stocks not to buy. Wong Ngit Liong bought a reasonable stake at a bit under a dollar, and management can only learn from such a master; earnings and the business are growing nicely. I'd love to get in at the right price.

Dear Anonymous, it doesn't have much upside from here. There is some efficiency improvement due to targeting utilisation of their backhaul routes but if you look at macro picture, I believe globalisation will slow down over the next few years and that can only be bad for container trade-dependent plays like Goodpack.